Options are a brilliant trading tool, even for those who may not consider
themselves to be traders. After all, where else can you use a variety of
different strategies on just one type of security to keep the returns rolling in
on a regular basis? Theres nothing wrong with buying stocks. (Thats because you
can collect a double dividend by selling calls against them and, oftentimes,
collecting a scheduled dividend payout as well). But you might see your
portfolio doing well when the markets up, and then most of your holdings
collectively dropping when the market plummets. And if youre only holding
stocks, youre missing out on a whole lot of potential profits that you wouldnt
otherwise have access to. While our goal as traders and investors is to pick
securities that remain strong no matter what else is going on in the world,
inevitably youll have a dud (or two, or five, or 10). And that means you need to
set aside a portion of your portfolios where youre both spending a small amount
of cash to get positioned for more and scheduling regular paychecks from the
market in the form of selling to collect premium. And only options let you do
that, month after month (or even week after week). So as 2011 turns into 2012
this weekend, if your resolution (once again) is to have a prosperous new year,
be sure to include trading options as a tool in fact, perhaps the only tool you
need to help you reach this goal and surpass it! To get you started, we here
at Stutland Volatility Group have four options trades using a variety of
sectors and strategies to set you up for some great options gains during the
first part of the new year. Lets take a look at them now Trade 1: T Long Call
Buy the T March 28 Call for $2.10 with T trading @ $30.00 AT&T (NYSE: T ) stock
offers the best of both worlds for investors. Its 6.0% annual dividend yield
makes it a great income trade, while the company's fundamentals are setting
the stock up for growth and capital appreciation in the coming year. By buying
the T March 28 Calls, traders can control the stock with minimal cash upfront.
This call is likely to expire in-the-money (that is, with the stock trading
above the $28 strike price) because the near-certainty of AT&T's dividend in
this uncertain market makes the stock very attractive. This translates into
significant demand for the stock each time it dips and its yield increases.
Should this call expire in the money, investors can exercise their option to buy
the stock at $28, locking in a yield of 6.3% in 2012. Trade 2: WDC Covered Call
Buy 100 shares of WDC @ $31.25 Sell the WDC Feb 33 Call @ $1.55 You can gain
exposure to Western Digital Corp. (NYSE: WDC ), a mid-cap hard drive producer,
by buying the stock and selling a call against it. Western Digital has been
growing its margins at a steady clip, is expected to take market share from
rival Seagate (NASDAQ: STX ), and is awaiting approval from Beijing for its
proposed acquisition of Hitachi's storage business. The WDC Feb 33 Calls are
trading with a nearly 50% implied volatility, which means there is a big premium
to be had in selling them. This trade will make your effective basis in the
stock $27.90, and it would provide a call-away yield of 15% in just 50 days.
Trade 3: CEO Long Call Buy the CEO July 180 Call @ $17 CNOOC Ltd. (NYSE: CEO )
is a Chinese company involved in the exploration, development, production and
sale of crude oil and natural gas. There are several catalysts that could boost
the price of oil in China in 2012, which would give CNOOC's bottom line a big
boost. China and India are likely to continue increasing their strategic
reserves of crude oil. Unrest in Kazakhstan could endanger a 5
million-barrels-per-day supply of crude oil to China. Iran, Iraq and Syria are
all sources of major uncertainty and could cause Middle Eastern oil to trade
with a significant risk premium in its price. Should central banks, notably the
Fed and European Central Bank, continue their quantitative easing, energy prices
will continue to rise. Should some or all of these materialize in 2012, CNOOC
Ltd. is likely to see significant appreciation. Buy the CEO July 180 Calls for
$17 to gain exposure to this upside with only a tenth of the downside risk and
margin there is to owning the stock. Trade 4: AOL Long Put Buy the AOL April 14
Put for $1 with AOL trading @ $15.50 Given that AOL's (NYSE: AOL ) dial-up
business is now obsolete, the company's only source of income in the near
future is its online advertising business. Unfortunately, this business has been
costing the company $500 million annually. Since spinning off from Time Warner
(NYSE: TWX ) in 2009, AOL has been competing directly with Google (NASDAQ: GOOG
) and Facebook, among others, for ad dollars. So far they have been loosing the
battle, and management has yet to come up with a plan to turn their fortunes
around. The stock is poised to fall in 2012, as its current price of $15.50 is a
severe overvaluation. Buying the AOL April 14 Put costs only $1 and gives
traders exposure to all of AOL's downside past $14.
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